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ASX CLOSE: Market finishes higher; Commonwealth Bank of Australia surges

IG Markets Ltd

Friday 15th January 2010

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Across Asia, regional markets are mixed this Friday as Intel's better-than-expected Q4 report boosted technology, in turn helping to offset falls among steel and energy companies.  The Kospi and Shanghai Composite are the best performers, up 0.8% and 0.5% respectively while the Nikkei 225 is 0.4% stronger. The Hang Seng is down 0.2%.

Down under, the ASX 200 finished the session 1.6 points higher at 4899.6% after what could only be described as one of the craziest ends to a week we've ever seen. At 3.58pm, Commonwealth Bank of Australia, the second heaviest weighted stock on the market announced a significant upgrade to its profit guidance. Consequently, the stock surged, dragging the financial sector from deep in the red to 0.6% higher and in turn, taking the ASX 200 from approximately 0.4% lower to flat on the session.

The upgrade is a massive boost for the sector and sentiment towards banks. Banks have really played second fiddle to the materials sector over the past 4 to 6 weeks so this could be the catalyst needed to awaken them from their slumber.

Before the upgrade from Commonwealth Bank of Australia, it looked like people didn't want to hold positions over with weekend, especially considering there is some important economic releases due out tonight in the US and Europe, as well as JPMorgan reporting its 4th quarter results. Also, Monday is Martin Luther King Day in the US so there will be no trade. Volumes are very light too, which could be exaggerating some of the selling.

Turning our attention to the market and the energy sector was the worst performer, down 1.1%. Paladin Energy, Woodside Petroleum, WorleyParsons and Santos were the major decliners, all finishing down between 1.4% and 1.7%.

In a report from Merrill Lynch, Santos was downgraded to ‘neutral' from ‘buy, with their target price trimmed to $14.73 from $16.03 on the back of higher cost estimates for Santos' Gorgon LNG project and the risk of a material capital raising. They envision gross capex for a two train development at GLNG of $20 billion. To be clear, Merrill Lynch still believe in a positive long-term outlook for Asian gas demand. But, they note it is currently a buyer's market, given supply potential outstrips the demand outlook. Combined with evidence of cost pressures and labour constraints, they believe regional LNG project returns will be squeezed. Asset quality will be the differentiating factor as to which projects will make it to final investment decision along the timelines currently presented by management teams. Against this backdrop, Merrill Lynch is lowering their overall exposure to LNG-biased explorers and producers. Their preferred LNG exposure is Oil Search.

Still in the energy sector and Karoon Gas continued yesterday's slide, finishing lower. This price action indicates that investors are unconvinced by management's reassurance that inconclusive early tests at its key Poseidon-2 well may be down to a mechanical glitch. Today's fall in the share price means Karoon's stock is now below its 22 December level when it said the Poseidon-2 well had struck hydrocarbons with similar intervals to those penetrated by company-transforming Poseidon-1 well (about six kilometres away). A report from Macquarie Group said the "inconclusive" initial test result on its Poseidon-2 natural gas well was unfortunate. It did not fit with developments at the well head and, consequently, significant uncertainty about the ultimate result remains. It is clear that early results have not been encouraging, suggesting that the test may have been conducted below the gas/water contact, which would limit the upside resource case. The Karoon investment rationale is "largely built" on the Poseidon discovery, with the shares rallying 53% in the week following the initial discovery. Macquarie Group retains its $8.50 price target and an ‘underperform' rating.

After weaker US leads, the materials sector detracted significant points today, closing the session 0.4% lower as the likes of BlueScope Steel (-1.9%), Lihir Gold (-1.5%), Newcrest Mining (-0.9%) and Rio Tinto (-0.7%) all declined. Fortescue Metals Group finished in the black, rising 1.9%.

Despite boosting its first half profit guidance and full year sales forecast this morning, Macarthur Coal lost 1.4% for the session on disappointment over the timing of coal shipments from Middlemount. Macarthur Coal upped 1H10 profit guidance to between $37 and $42 million from a range given in November of $30 to $38 million. The upgrade is due to strong 1H10 sales of 2.8 million metric tons, ahead of guidance for between 2.4 and 2.7 million. They also upped their full year sales forecast to between 4.8 and 5 million tons, up from previous conservative amount of 4.6 million tons. However, they had bad news on the Middlemount development. Macarthur now say it is unlikely to ship any coal in fiscal 2011 due to a lack of progress on agreements on temporary water and rail infrastructure. In a note from UBS, people had been expecting Macarthur could sell as much as 900,000 tons of Middlemount coal in 2011. You are now looking at roughly a 10% downgrade to volume in fiscal 2011.

Also, following yesterday's production numbers Citigroup downgraded Rio Tinto to ‘hold' from ‘buy' despite the broker lifting their target price to $83 from $79 after a solid Q4 production. They believe ‘it's time for a breather'. Citigroup lifted core net profit forecast for 2009 by 10% to US$5.66 billion on the back of good production numbers and mark-to-market of commodity prices but says it's still below the market consensus of US$5.8 billion. They also increased 2010 net profit forecast by 6% to US$7.97 billion except warns significant upside potential remains from iron ore and base metals given their conservative forecasts.

Following the late shenanigans with Commonwealth Bank of Australia, the financial sector finished the session 0.6% higher. We actually thought financial strength would offset material weakness at the beginning of the session; we certainly didn't think it would require a profit upgrade from Commonwealth Bank of Australia to finish in the black.

Commonwealth Bank of Australia finished the session 2.3% higher while Bendigo Bank rose 1.7%. The remaining big four banks all jumped into positive territory late, rising between 0.1% and 0.9% with National Australia Bank the best performer.

 

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
This information is provided for information purposes and should not be regarded as financial product advice. This information does not take into account your specific objectives, financial situation or needs. Therefore you should consider the information in light of your specific objectives, situation or needs before making any trading or investment decision. IG Markets recommends you take independent financial advice before any decision whether to trade with IG Markets in the products we offer.



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